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The Media Keep Saying the GOP Tax Bill Is Best for Rich Families. They’re Wrong.

There is one thing the mainstream media agrees on about the
Republican tax cuts. The “GOP Plan Evolved into a Windfall
for the Wealthy,” said a Washington Post
headline. An Associated Press
story discussed, “How GOP Tax Plans Would Reward Rich
Families.” And a New York Times
editorial called it, “A Tax-Cut Bill to Make Scrooge
McDuck Proud.”

That narrative is everywhere, and it is false. The GOP’s
tax proposals would give the largest relative cuts to the middle
class, increase subsidies to low-income households, and make the
tax code more progressive. Those are misguided policies, but that
is what Republicans will likely deliver even with some final tweaks
this week.

Let’s look at data on the Senate tax bill from the Tax Policy
Center. In 2019 the middle-income quintile (or one-fifth) of U.S.
households would receive an average tax cut of $840, while the top
quintile would receive $5,420. At first blush, the top group seems
to do better.

The GOP’s tax proposals
would give the largest relative cuts to the middle class, increase
subsidies to low-income households, and make the tax code more
progressive.

However, the top group currently pays far more in income and
estate taxes, so its relative cut would be smaller. The tax cut for
the top quintile would be 8 percent of current taxes, while the cut
for the middle quintile would be a huge 23 percent. The Senate bill
trims the top income tax rate and the rate on small businesses, but
it cuts rates, doubles the standard deduction, and increases child
credits for the middle class.

Let’s look at other TPC data. The Senate bill would give
62 percent of the overall tax cut to the top quintile in 2019. But
that group pays 84 percent of individual income
taxes and 67 percent of all federal taxes. Since the tax cut
percentage for that group is smaller, it would pay a larger share
of overall federal taxes going forward.

What about the middle quintile? It currently pays 10 percent of
all federal taxes, but would receive 13.5 percent of the Senate
bill’s tax cuts in 2019. Thus, middle earners would gain an
extra-large share of the tax cuts.

As for lower-income households, they would receive a subsidy
increase. Currently, the bottom two quintiles of households do not
pay any federal income taxes on net. Yet those groups would receive
substantial tax “cuts,” which would be largely an
increase in refundable tax credits.

The bottom line is that the GOP tax cuts would make the tax code
more “progressive,” which is not a good idea because we
already have the most progressive individual tax system of any
major industrial country.

Increased progressivity, or redistribution, undercuts the growth
potential of tax reform. The key to growth is cutting marginal tax
rates because that encourages working and other productive efforts,
yet the House and Senate bills only modestly trim individual
rates.

News reports say the final tax deal cuts the top individual rate
from 40 to 37 percent, which is good news because the top rate
creates a lot of economic damage. A basic rule is that damage rises
with the square of the marginal tax rate, so a 40 percent rate is
four times more damaging than a 20 percent rate. The upshot is that
every percentage point cut in the top rate matters.

Consider also that high earners, such as doctors and executives,
are productive people who have flexibility in their working and
investing decisions. They will respond relatively strongly to tax
rate cuts. So for individual tax reforms, high earners are the key
to boosting growth.

The GOP’s individual reforms produce only modest growth
benefits because the rate cuts are small. Tax Foundation
simulations find that the GOP’s business tax cuts would boost
the economy twice as much as the individual cuts, even though the
revenue losses from the latter are much larger. If the final bill
cuts the top individual rate, that would boost the growth
benefits.

Whatever the final bill looks like, many news articles are
likely to call it “tax cuts for the rich.”
Unfortunately, that will embolden Democrats to try and undo the
pro-growth elements of the GOP tax reforms in the years ahead.

Republicans will need to set the record straight. The truth
about their plan is that the largest relative tax cuts go to the
middle class, while the business tax reforms will benefit all
income groups from stronger economic growth.